Question 5

Redway ltd is an internet service provider whose ultimate parents company is in us. Redway is a nz company which won a highly complex brodband network contract in Auckland last year. During the course of the audit you become aware that redway ltd was advised that the project would be suspended until further botice as a result of the likely change in government policies.

Redway ltd had already purchased sophisticated equipments for the project and its cost was to be paid back over three years contract. The company has already started the project and employed two highly paid experts in broadband architecture. As a result of the suspension of the project, the company is now experiencing growing cash flow difficulties.

The company has recently applied for a significant increase to a borrowing facility. Management is confident that the company will continue to survive. If necessary it claims it can resort to cutbacks in its own future capital expenditure programme or re schedule existing debt arrangements and request the financial supports from the parent company in the us. Below is a set of financial ratios and an aggregated income statements

Ratio	2021	2020	industry
Current ratio	1.1	1.2	1.6
Quick asset ratio	0.8	0.9	1.05
Debt to equity ratio	15.5	12	0.065
Gross profit ratio	11.7	14.9	21.1%

Redway ltd

Income statement

	2021	2020
Revenue	20584824	19025268
Cos	(18173024)	(16198185)
Gross profit	2411800	2827083
Other income	74651	28713
Administrative expense	(7195654)	(8414233)
Finance cost	(3761345)	4826528)
Loss before tax	(8470548)	(10384965)

1. Discuss the situation of Redway Ltd' going concern.

1. List the audit procedures to evaluate the appropriateness of the going concern assumption ofRedway Ltd.

1. Audit evidence indicates that the going concern assumption of Redway Ltd is uncertain. Assume all other aspects of the financial statements are fine.

1. Management has fully disclosed the matter in the financial statements. Explain with reasons what type of audit opinion you would give.

1. What if management did not fully disclose the matter in the financial statement? Explain with reasons the type of audit opinion you would give.